Coles makes a bold choice in Jeff Kennett

Coles' appointment of Jeff Kennett as the independent arbiter between the chain and its suppliers shows it is taking criticisms about its dealings with suppliers very seriously.

Whether the appointment of Jeff Kennett to oversee Coles’ new supplier charter reflects the perceived duress the two major supermarket chains are under or if it is simply good corporate and business practice, it is a sensible response to the distrust that has emerged from suppliers as the chains have sought to improve their productivity.

The new Coles charter will regulate the relationships Coles has with farmers, food processors and its other suppliers and provide a framework for dealing with and escalating any disputes they have with the chain.

Coles will introduce a dispute resolution manager, high-level internal reviews and ultimately access to Kennett, the 'independent arbiter'.  Acting as a kind of ombudsman for suppliers, Kennett will have the ultimate power to effectively fine Coles for unresolved breaches of its charter.

The charter itself commits Coles to negotiating and dealing in good faith and with transparency; commits it to upholding the terms of its supply agreements; to developing principles for product ranging, shelf-allocation and delistings; prohibits Coles from favouring its own brand products; protects suppliers intellectual property rights; and commits it to the dispute resolution processes.

The choice of Kennett as independent arbiter is a demonstration of the seriousness of Coles’ intent to improve its dealings with suppliers under its new managing director John Durkan.

It was Kennett who drew the Australian Competition and Consumer Commission’s attentions to Coles’ claims that par-baked bread was being freshly baked in-store, which led to a Federal Court judgement in June that the claims were false, misleading and deceptive.

Durkan would be well aware that Kennett is fiercely independent and very (and very loudly) outspoken. Giving him the freedom to publish his decisions, broadcast any concerns via the media or with the ACCC and make recommendations that are binding on Coles is a bold and brave approach to responding to criticisms of its dealings with suppliers.

The charter is designed to complement rather than duplicate or displace the voluntary code of conduct both the major chains agreed last year to introduce to regulate and provide a more structured approach to their dealings with suppliers.

There is no doubt that there have been increasing tensions between the chains and suppliers, as their drive to lower costs and improve their efficiency has been pushed back through their supply chains.

That drive has produced benefits, not just for shareholders, but for consumers as grocery prices have been lowered by the intensity of the competition between them. Given the scale of the chains, however, there is a fine and fuzzy line between putting pressure on suppliers to become more efficient and misuse of market power.

The fact that the line is fine and fuzzy and that suppliers have been agitated has resulted in calls for quite draconian responses from the ACCC and legislators. It was a major contributing factor to the Abbott government’s decision to conduct a root-and-branch review of competition law chaired by Ian Harper.

Of particular concern to the chains would be the push by the ACCC and others for the introduction of an 'effects' test in Section 46 of the Competition and Consumer Act. At present a company with substantial market power can’t take advantage of it for the purpose of eliminating or substantially damaging a competitor.

If an effects test were introduced it wouldn’t matter whether or not the company intended to damage a competitor or lessen the intensity of competition in a market. If the effect of its actions were damaging to a competitor, those actions would be deemed illegal.

The chains and their ability to compete would be the most obviously and adversely affected by the introduction of an effects test, although it would have a chilling impact on competition across the economy.

Coles is also facing an 'unconscionable conduct' case brought by the ACCC in relation to what Coles calls its 'Active Retail Collaboration' program. Under that program Coles asks for rebates or discounts in return for giving suppliers access to a data-sharing portal.

The portal leads to more efficient ordering by Coles and lower production, administration and transport costs for suppliers. Those who sign up also get access to forward planning information, commitments from Coles to ordering 'economically efficient' quantities of their products, certainty and advance information about product promotions and 12 weeks’ notice of an intention to de-list products.

The ACCC action alleges Coles used undue influence, pressure and unfair tactics to extract better trading terms from suppliers in order to improve its earnings, among other things. Coles has made it very clear it will defend itself against the ACCC charges very aggressively when the case is heard next year.

Coles’ charter has therefore been developed within a multi-layered context, some of which relates to external threats from regulators and legislators. But at its core it is driven by the business need to improve its relationships with its suppliers. For a company of Coles’ prominence and scale, distrust and conflict aren’t conducive to good long-term business relationships and reputations.